7 Possible Ways to Legally Lower Crypto Taxes
Many investors consider crypto to be a decent investment, but they overlook the possibility of having to pay taxes on their profits. Here's everything you should know about crypto and taxes. Crypto is a relatively new asset class that has rewarded early investors handsomely. However, once wealth is created, it is almost certain to be taxed in some form.
What is the procedure for calculating crypto taxes?
The young majority of people have shown an inclination to invest
in crypto. It is largely classified as a capital asset. This implies you'll
have to pay capital gains tax on it. Depending on the type of capital gain, you
must pay capital gains taxes.
The two forms of capital gains are short-term and long-term, and
they are determined by how long you retain the asset, in this example, it is crypto.
When you sell them for more than you paid for it and keep it for a year or
less, you have made a short-term capital gain. These are taxed at the same
rates as regular income.
Long-term capital gains are realised when you sell crypto for more
than you paid for it, but the investment must be held for more than a year.
These profits are subject to lower long-term capital gains tax rates. You will
be subject to a long-term capital gains tax if you hold crypto for more than a
year before selling or trading it.
Long-term capital gains tax rates are different from short-term
capital gains tax rates, and they can range from 0% to 20% depending on your
total income. It should be mentioned that there are presently no explicit tax
restrictions regulating the taxation of crypto under the Income Tax Act of
1961. If you've made crypto investments, make sure to record your profits on
your tax return, as failing to do so could result in a penalty.
1.
Declare your
crypto as a source of income
Taxation differs depending on whether you receive crypto in return
for products and services or mine crypto. When you get crypto in certain
situations, it is recognised as income. So do keep track of and report the
crypto’s fair market value.
This income will be taxed as regular income when you report it.
The slab is normally higher to the slab on capital gains. The amount you report
as income for the crypto you received is your basis, a tax phrase that refers
to the currency's initial value when you received it. You may eventually decide
to sell the same at a later date. After that, you can use that basis to figure
out how much capital gain you'll have to pay in capital gains taxes.
This is also true when it comes to crypto mining. Crypto mining,
on the other hand, is typically regarded a self-employment activity. Mining
crypto earns you taxable income, which you can report on Form 1099-NEC as
self-employment income at the fair market value of the crypto on the day you
received it. You must report this taxable income even if you do not receive a
1099 form.
2.
Keep your
crypto for the long haul
You normally do not owe taxes on crypto until you sell it, if you
are holding it as an investment and it is not making any revenue. You can
completely avoid paying taxes if you don't sell any during a given tax year.
Make sure the crypto you sell has been held for more than a year
to reduce your tax burden. If it has, you may be eligible for lower long-term
capital gains tax rates on your crypto sale. You might save a lot of money on
your tax return if you do this.
3.
Losses should
be used to balance out your crypto profits
You either make a profit or a loss when you sell an investment.
Which one you get depends on the asset's cost base and how much you sold it
for. Capital gains and losses can be adjusted against each other. You can consciously
take advantage of this to reduce the amount of tax you owe.
Gains and losses of the same sort offset each other first in terms
of technicality. Short-term gains would offset short-term losses, and long-term
tax items would do the same. Then you can use a net gain of the other type to
offset any ensuing net loss.
Consider the following case study: a Rs. 10,000 short-term loss, a
Rs. 20,000 short-term gain, a Rs. 30,000 long-term gain, and a Rs. 50,000
long-term loss. In this situation, you'd make a net short-term gain of Rs.
10,000 and a net long-term loss of Rs. 20,000. Then you'd subtract these
figures to arrive at a net long-term loss of Rs. 10,000. If you have a total
capital loss for the year, you can claim a portion of it and carry it over to the
next year.
4.
Sell your assets
during a low-income year
Whether you have short-term or long-term capital gains, the tax
rate you pay is determined by your income. Your tax rate will be reduced if
your taxable income is low. You may be able to save money on taxes by selling
crypto that you anticipate will appreciate in years when you will be paying
taxes at a lower rate.
5.
Make a
charitable donation
If you list your deductions, donations to a qualifying charity may
be tax-deductible. Before giving an asset, you must have owned it for at least
one year. Donating property, such as crypto, may be eligible for tax benefits.
You may usually deduct the fair market value of your crypto from your taxes,
but you won't have to pay capital gains taxes. The amount of the deduction
could be limited, so talk to your tax advisor about how a donation could help
you save money on taxes.
6.
Give gifts to
your loved ones
Giving crypto as a gift could help you avoid paying taxes on your
gains. The recipient of the crypto will need to know your crypto basis in order
to figure out how much tax they owe when they sell it. They will have to pay
tax on the entire gain over your base, although it may be less than you would
have paid if you had paid it yourself.
For example, a successful adult in their fifties is likely to be
in a higher tax rate than a new college graduate starting their first job. Give
your crypto to a younger family member, and your overall tax liability on that
currency may be reduced.
7.
Keep it until
you pass away
If you don't require access to the money you've put into your
crypto, you might utilise it to develop generational wealth. You must trust in
the long-term worth of crypto to take advantage of this strategy to effectively
reduce the incidence of tax. Make sure to consult with your tax advisor to
properly plan for this type of inheritance.
If you buy crypto assets before they skyrocket in value, you might
be able to make a lot of money. If you're fortunate enough to have this happen
to you, a little tax planning could help you lower the amount of money you owe
in taxes on your crypto gains. When dealing with a tax professional, the list
of suggestions above may be useful.
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